What is the business model of Citadel Securities, a world-renowned market maker?
On January 11, according to the Wall Street Journal, the world-renowned market maker Citadel Securities completed a $1.15 billion financing at a valuation of $22 billion, led by Sequoia Capital and cryptocurrency investment firm Paradigm. Sequoia Capital partner Alfred Lin will also join the Citadel Securities board.
This is the first external investment accepted by Citadel Securities, marking the birth of the world’s first super unicorn in 2022. The investment will fund the company’s continued global expansion and could be a precursor to an IPO. What’s the point of this company’s business model?
Left-handed hedge funds, right-handed market makers
Citadel focuses on asset management, and Citadel Securities focuses on brokerage. They are two different companies, but they are both managed by a man named Ken Griffin.
In 1990, Griffin founded the hedge fund Wellington Financial Group with $4.6 million in start-up capital. In 1994, Wellington Financial Group changed its name to Citadel, which translates to “castle” in Chinese. In just eight years since its founding, Citadel’s assets have grown to more than $2 billion.
Since its inception, Citadel has grown rapidly, often making high-profile acquisitions of distressed or unpopular assets. Unlike many other prominent investors, Griffin is generally tight-lipped about his investment strategy. With the support of mathematical models, his risk appetite will be higher. During the financial crisis, Citadel’s leverage ratio was as high as 7:1, that is, every $1 in assets corresponds to $7 in liabilities. By mid-2011, although it had fallen to 4:1, it was still at a high level.
At the end of 2008, Citadel’s largest funds were down 55 percent. In 2009, however, they rebounded strongly with a 62% return. Unlike other hedge funds, Citadel, under Griffin’s leadership, “expanded aggressively” in the post-financial crisis era. In the 18 months from the start of 2014, Citadel’s AUM jumped by $10 billion, from $16 billion to $26 billion, thanks to a 29 percent increase in its main fund.
As of early September 2021, Citadel’s assets reached $38 billion. Wellington, Citadel’s flagship fund, returned 7.8% in a month of volatility in the U.S. stock market last September.
Citadel Securities, founded in 2001, is one of the largest market makers in the United States. According to the company’s website, Citadel Securities’ automated stock trading platform handles approximately 27 percent of U.S. stock trading volume, involving more than 11,000 U.S.-listed securities and more than 16,000 over-the-counter securities.
Citadel Securities, which has been engaged in the market maker business since 2002, has been keeping a low profile until now, but the outbreak of the “retail war” last year made this low-key market maker move from behind the scenes to the front, and was well known to more people.
At the beginning of 2021, American retail investors formed a long front through social platforms, collectively pushing up the stock prices of stocks such as GameStop, causing heavy losses for shorts. After that, Robinhood, the main trading platform for retail investors, suddenly set trading restrictions on relevant stocks – only selling but not buying.
In the event, Citadel Securities executed most of Robinhood’s trades and Citadel invested $2 billion in GameStop’s main short seller, Melvin Capital, leading to speculation that Citadel Securities could align with the short sellers’ interests, weighing on retail investors.
Although the subsequent investigation by the SEC showed that this speculation was not established, Citadel Securities was also exposed to the front of the stage from a low-key behind-the-scenes event in this incident. Citadel Securities’ position and performance have not been dealt a serious blow by this incident. To be sure, Citadel Securities plays a key role in trading the entire stock market and may have made a lot of money in the GME frenzy. They The more stocks you handle, the more “crumbs” you get.
Citadel Securities, which has become the focus of the market due to the “retail war”, has received investment from Sequoia Capital and cryptocurrency investment company Paradigm, which is the first time it has accepted external investment since its establishment. Obtaining a large scale of financing also means that Citadel Securities will further expand in the follow-up.
Preparing for an IPO next?
Citadel Securities provides institutional and retail investors with market-making services for trading stocks and fixed-income products. Its institutional business serves more than 1,600 clients, including many of the world’s largest sovereign funds and central banks. It operates in 50 countries around the world, with 12 offices in North America, Asia Pacific and the Middle East, including Shanghai and Hong Kong SAR.
After this round of external investment, Citadel Securities has also been valued at $22 billion. Griffin’s own wealth would also increase by $6.5 billion to $27.6 billion, according to the Bloomberg Billionaires Index.
According to Citadel Securities’ official website, Citadel Securities is a leading global market maker designed to reduce transaction costs and help meet the liquidity needs of asset managers, banks, broker-dealers, hedge funds, government agencies and public pension plans. Foreign media reported that Citadel Securities may handle about 40% of U.S. retail trading volume.
The profit of Citadel Securities mainly depends on the price difference between the buying and selling prices. Although the price difference per unit may be only a few cents, it adds up to a lot. Millions of transactions per day make it a lot of profit. Citadel Securities mainly buys trade flows from retail investors’ favorite low-fee or even zero-fee platforms, such as Robinhood, the protagonist of the retail war, and electronic trading platform Charles Schwab.
The Wall Street Journal reported in 2015 that Citadel was considering an IPO; in 2019, Blackstone Group had been in talks to buy Citadel Securities and a stake in Citadel, a hedge fund that executives estimated at the time at $5 billion To between $7 billion, but there has been no progress since then, this time Citadel Securities suddenly accepted external investment in a high-profile manner, perhaps it is not known that it is considering listing.
It is worth noting that Paradigm, one of the few cryptocurrency investment institutions invested by the Yale University Endowment Fund, is also one of the investment institutions. As one of the investors, Paradigm co-founder and partner Huang Gongyu not only praised the technology of Citadel Securities, but also expressed his expectation that Citadel Securities will be involved in new asset classes, including cryptocurrencies.
Although this is only speculation at the moment, Citadel Securities’ business model may also undergo some transformation after this financing. Perhaps it has become a strain for Citadel Securities, too, to the extent that the concentration of market makers’ market share has caught the attention of regulators.
Although it is not yet known how Citadel Securities will enter the cryptocurrency market, it is expected that the addition of Citadel Securities will change the industry ecology.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-does-citadel-securities-attract-so-much-money-after-completing-a-new-round-of-financing-at-a-valuation-of-22-billion/
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